CMPC 312 Prelim Activity #1- Engagement Letter
(for exclusive use by the School of Accountancy, Management, Computing and Information Studies, Saint Louis University)
Gabriel, CPA is reviewing the draft audit engagement letter prepared by her staff. Excerpts of the draft letter are presented
below:
Gentlemen:
We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter. Our
audit will be conducted with the objective of our expressing an opinion on accuracy of the financial statements.
We will conduct our audit in accordance with Philippine Financial Reporting Standards. Those standards require that
we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial
statements are free from any misstatement. An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including
the assessment of the risks of material misstatement of the financial statements, due to error. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any
accounting and internal control system, there is unavoidable risk that even some material misstatements may remain
undiscovered. As agreed with you, we will not consider the company’s internal control structure, and instead we will design
audit procedures that are appropriate in the circumstances.
We remind you that the responsibility for the preparation of financial statements (except for the notes) that present
fairly the financial position, financial performance and cash flows of the company in accordance with Philippine Financial
Reporting Standards is that of the management of the company. Our auditor’s report will explain that management is
responsible for the preparation and the fair presentation of the financial statements in accordance with the applicable
financial reporting framework and this responsibility includes:
• Designing, implementing and maintaining internal control relevant to the preparation of financial statements
that are free from misstatement, whether due to fraud or error.
• Selecting and applying appropriate accounting policies; and
• Making accounting estimates that are appropriate in the circumstances.
As part of our audit process, we will request from management written confirmation concerning representations
made to us in connection with the audit.
We look forward to full cooperation from your staff and we trust that they will make available to us whatever
records, documentation and other information are requested in connection with our audit.
REQUIRED:
1. Box or highlight any errors in the draft engagement letter ( 8 statements x 2 = 16 pts.)
2. Enumerate at least two deficiencies in the draft engagement letter (4 pts.)
Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 1
Reference: Ireneo, J.M., Ireneo, S.C. & James, G.R. (2012). Auditing and Assurance Principles. Cainta, Rizal: FC Arellano
Publishing
TWO DEFINCIENCIES IN THE ENGAGEMENT LETTERS ARE:
1. The draft is lacking of its basis on which fees are computed and any billing arrangements
2. Any restrictions of the auditor’s liability when such possibility exists.
Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 2
